She says she suffered years of physical and mental abuse in the armed forces, claiming to have been "beaten up" on a daily basis.

She also says the navy tried to have her involuntarily committed to a psychiatric facility.

The department said in a statement it had agreed to a compensation package with Lt Commander Fahy, but that the terms of the agreement would not be released.

The department also said it would help Lt Commander Fahy - who is still an officer - find civilian employment.

She has been on paid leave since her grievances were aired during a report on ABC television in May this year.

In the program, Lt Commander Fahy lashed out at the service she joined as a young woman in 1986.

She said the abuse began when she was stationed at the Australian Defence Force Academy (ADFA) in Canberra.

"On a daily basis I was beaten up ... I can't remember a day where I wasn't punched or kicked or spat on," she said.

Despite this, she topped her year.

"At the graduation parade I got punched, and in fact when I walked toward the governor-general to receive my award I got spat on so by the time I reached him I had saliva on my uniform," she said, adding that it had also been a hard time for her family.

"They had seen the bruises over my body in the last two years and I think they knew that I would probably get beaten up."

Defence admitted in the statement that problems had existed at academy.

"Defence recognises that aspects of the environment at ADFA during its early formative years were less than desirable," the statement read.

Lt Commander Fahy was promoted in 2000 to executive officer of HMAS Stirling in Perth - but claimed that the abuse there only worsened.

The base's commanding officer took an instant dislike to her, she alleged.

The doctor wrote a letter to a consulting psychiatrist that allegedly implied she had attempted suicide, was borderline depressed and had a personality disorder.

The psychiatrist diagnosed her as having bipolar disorder and suggested she be hospitalised and sedated.

Defence admitted medical procedures had not been followed.

"Defence acknowledges that while Lt Commander Fahy was serving as executive officer HMAS Stirling there was a failure to comply with appropriate medical protocols, as found by the West Australian Medical Board," the department statement said.

"In bringing this matter to a mutually agreed resolution, both the Chief of the Defence Force and Chief of the Navy regret the distress that this has caused to Lt Commander Fahy and her family."